I am so excited to see that consumers are taking control of the escalating mortgage interest rate situation by accepting creative borrowing solutions to get their homes sold and to get buyers into them!
- A 2-1 buydown is a type of financing that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate.
- The rate is typically two percentage points lower during the first year and one percentage point lower in the second year.
- Sellers, including home builders, may offer a 2-1 buydown to make a property more attractive to buyers.
How 2-1 Buydowns Work
A buydown is a real estate financing technique that makes it easier for a borrower to purchase the home that they want and still have a payment that they can afford. A 2-1 buydown is a kind of temporary buydown, in this case lasting for two years.
In a 2-1 buydown, the interest rate will increase from one year to the next until it settles into its permanent rate in year three.
A home seller pays for a buydown. That payment will be in the form a lump sum, paid at closing, and deposited in an escrow account with the lender which is then used to subsidize the borrower’s reduced monthly payments.
Sellers, including home builders, often use 2-1 buydowns as an incentive for potential purchasers.
2/1 Buydown mortgage example
Homebuyers, Mr. and Mrs. Smith, would like to purchase a $500,000 home but at today's mortgage interest rates of 7.808%, with 20% down, that would make their monthly payment $3,099 per month which is more than they feel comfortable spending. But they love the home!
The sellers decide to offer the Smiths a 2/1 rate buydown that they will pay for at closing. The sellers will pay the lender $9,654.84 at closing in order to buy the rate down for the Smiths to 5.808% for the first 12 months and 6.808% for the second twelve months. This results in a savings of $6,392.28 the first year and $3262.56 the second year for the Smiths and brings their payments to $2349.56 and $2610.37 respectively making the home much more affordable for them.
The Smiths interest rate will then return to 7.808% at the beginning of the third year unless they choose to refinance before that time into a lower fixed interest rate.
Is a 2/1 Buydown Mortgage a Smart Choice?
The 2/1 buydown mortgage can be a smart choice as long as you feel you can afford the payments after the two-year period of reduced interest has expired.
You get two years of reduced payments, which allows you to use the money for savings, make necessary purchases, or buy something nice for your new home. This type of mortgage can also help you qualify for a larger loan amount than you would otherwise be offered.
The major drawback of a 2/1 buydown mortgage is the fact that it has to be offered by the seller because they fund the portion of the payment that’s not being paid by the borrower. The implication for the seller is that they get less money for the sale of their home.
However, if their home isn’t selling quickly, the 2/1 mortgage is an incentive to get the home sold closer to their desired price point. A buyer can introduce it as a seller concession during the negotiation process.
As a borrower, you need to be prepared for your mortgage payment to grow in the second and third years of the mortgage. The first year has the lowest payments, the second year is larger, and the buyer has to resume paying the full amount in the third year.
This boils down to setting up a financial plan for making the larger payments after 24 months have passed since the purchase.
Using a 2/1 buydown calculator can help you determine if the 2/1 mortgage makes sense for your budget and the home you have your eye on. As with any mortgage program, whether the advantages and disadvantages outweigh one another will depend on your circumstances.
Here is the link to the buydown calculator:
With some creative negotiation skills and a bit of compromise real estate professionals are turning the real estate market scenario around and making this a more affordable and easier process for both buyers and sellers alike. Give me a call and let's discuss your options! The home of dreams IS within your reach!